Some of us dislike shallow or “bumper sticker slogan” levels of thinking. Economies and societies are very complicated things and we are very bad at understanding all the cause-and-effect interactions from any single public policy, as well intentioned as we might hope to be.
Consider the oft-repeated desire to enhance societal fairness by taxation policies that “soak the rich (income or wealth, though income normally gets more attention).” To be fair, some countries do so, even if others have tried and failed to see revenue gains.
If governments need revenue, why not take more from those who have the most? After all, some might argue, that’s why we have a progressive tax system (the tax rate increases as an individual's or entity's taxable income rises) in the first place.
One might take the same approach to taxing wealth, though that is even more problematic. Perhaps you have read William Hinton’s Fanshen about the social revolutions attempted in a single Chinese village from 1945 to 1948. They took the “soak the rich” approach to wealth.
Basically, what they discovered is that expropriating all the tangible wealth of the wealthy did not help.
Land reform was a success in destroying the old social order and empowering the poor politically, but did not solve the deep economic problems in rural China.
“Soak the rich” (usually phrased as “pay your fair share”) sounds good to many. But it hasn’t worked where it has been tried, simply because capital is mobile.
High-net-worth individuals have the means to move to lower-tax jurisdictions with relative ease:
France's 2012 supertax of 75 percent on incomes over €1 million saw a well-publicized wave of departures and was quietly abandoned after just two years having raised far less than projected
Sweden, which once had some of the world's highest marginal rates and a wealth tax, saw significant capital flight and eventually *cut* taxes substantially, including abolishing its wealth tax entirely in 2007, after concluding the tax was destroying more value than it captured
The UK's 50percent top rate introduced in 2010 was found by HMRC's own analysis to have raised little net revenue; it was reduced to 45percent in 2013
Some times a one percent increase causes capital flight.
Asset restructuring also happens. Wealthy individuals employ armies of accountants and attorneys whose entire professional purpose is legal tax minimization.
Higher marginal rates also reduce the incentive to take on additional risk, start new ventures, or work additional hours. This effect is debated in magnitude, but virtually no serious economist argues it is zero.
All of these dynamics are captured in the concept of the “Laffer Curve.” There is some tax rate above which additional increases actually reduce total revenue.
Economists debate fiercely where that peak rate sits, with estimates ranging from roughly 50 percent to 70 percent for top marginal income tax rates.
But set that all aside. Using the United States as an example, what would be the potential impact if none of the above actually happened?
If the government literally confiscated all the income of the top one percent of filers:
Any benefit is gained but once
Confiscating all the wealth of the Forbes 400 would fund the federal government for less than one year, and again, only once
A two-percent annual wealth tax on fortunes over $50 million might raise $200–300 billion per year, a single-digit portion of the federal deficit, at best
A 70-percent top marginal income tax rate might raise $50 and $300 billion per year, less than five percent of federal spending.
The fundamental arithmetic problem is that there are not enough “one percent” payers or even “top-10-percent payers” to fund a large modern welfare state.
Wealth taxes have been tried and abandoned by Germany, Sweden, France, Finland, Iceland, and others. Even if no behavioral changes occurred, low single digit rates of revenue increase are about the best we might expect to see from a one-percent wealth tax.
And even Switzerland, with a high payer base and low rates for its wealth tax, only generates about three percent of total tax revenue from that source.
Confiscatory policies cause behavioral changes by the wealthy, gaming the system in lawful ways.
But even in a fantasy scenario of zero behavioral response and total compliance, the additional revenue from hyper-progressive taxation on the wealthy would make only a modest dent in the fiscal gaps of large modern governments.
The numbers simply aren't big enough relative to the scale of government spending. There aren't enough rich people.
source: The Tax Foundation
The point is, simple sound bites, catchy slogans and concise bumper stickers are not a substitute for actual thinking about whether policies actually can work.
“Soak the rich” income or wealth tax policies fall neatly into those categories. They might make you feel good, but do not work in the real world to the extent you might imagine.
